In Search of a Market Economy

...Ralph Bunche Institute on the UN City University of New York...

...You must adopt a stringent fiscal and monetary policy to avert the dangers of hyperinflation...

...They took the same approach in their 1991 book, Antitrust Economics on Trial: A Dialogue on the New Laissez Faire...

...The Prime Minister does not think the people's concerns are groundless...

...It's not that I really favor gradualism—we might agree that the effort to change the system gradually caused Gorbachev to fail, and fall...

...former columnist...

...How do I overcome the gridlock created by recalcitrant conservative hard-liners in Parliament...

...New York "Times" Two empirically-minded economists...

...Advisor II: On several fronts...

...At the same time, provide capital to help small businesses get on their feet...

...The clashes of different perspectives, interests, aims, and methods may not be reconcilable...

...The Advisor, who combines the views of Harvard's Jeffrey Sachs and the Hoover Institution's Milton Friedman, believes the ills of a collapsed Communist economy can only be cured by an immediate "big bang," "shock therapy," a "bitter pill" or some other metaphoric rush to free markets, privatization, price decontrol, budgetary balance, and strict monetary discipline...

...Indeed, the tasks of reconstruction in the post-Communist world are unprecedented and, in many ways, more difficult than anything faced by war-devastated countries in the 1940s and '50s...

...he asks...

...You can't change from left-hand traffic to right-hand traffic gradually, with cars switching this year and trucks next year...

...Advisor II: I don't know...

...By getting the input of the good people in your Administration...

...Even in Poland, where the standard formula of free markets, price decontrol, privatization, tight money, and smaller deficits succeeded in raising the growth rate, eliminating shortages and reducing inflation, it has also brought an increase in unemployment steep enough to push voters back toward the hard-line ex-Communists—thus jeopardizing the entire effort...

...Advisor II: Sorry about that...

...What the conventional approaches to achieving economic reform neglect to take into account are the barriers to growth posed by the lack of legal, moral and institutional foundations for capitalism...

...How then, can the dreams be realized...

...At least they think they are...

...The severe shortage of capital is merely one of the hurdles the new governments must overcome...

...But many citizens, says the Prime Minister, are afraid that "will permit crooks, mafias, and the nomenklatura (the old management bureaucracy) to seize the country's wealth," while others fear "it will allow foreigners to buy up the country's assets, effectively turning its citizens into economic slaves...

...Prime Minister: Again, good slogans, but where do I start...

...Yet if a "big bang" is too hazardous and painful, and gradualism is too slow and wasteful, what else is there...

...The evidence suggests, in fact, that Russian privatization is turning out to be a field day for crooks and bureaucrats...

...For instance, the Prime Minister is obsessed with his own and his faction's survival: If he does not beat back the opposition no reform will be possible, so he must deal less with abstract truth than with winning and retaining the support of the people...

...The Advisor replies...

...The Prime Minister, who might be a cross between Russia's Mikhail S. Gorbachev and Boris N. Yeltsin is a pragmatic, intelligent politician fully aware of how tough it is to overcome the resistance to reform...

...I do not mean to imply that, because all characters in the "true drama" believe they are correct, they actually are...

...Prime Minister: You're about as much help as a hole in the head...

...Moreover, the two protagonists' statements are heavily footnoted with references to published sources, especially the writings of eminent economists, to prove there is nothing faked or caricatured here...

...And what's the third component of the transition...

...Those are spurious arguments, and you must not let them deter you from doing what needs to be done...

...in economics the tendency is to sympathize with President Harry S. Truman's plea for a one-handed economist...

...Consequently, instead of swiftly turning around the ex-Communist economies, as many Western experts forecast, the "shock treatment" programs are proving to be a great strain for the nations experiencing them, generating hostility toward foreigners, immigrants and minority ethnic groups...

...It would seem unwise, though, to rush to conclusions on questions as complex and multivalued as the ones being debated...

...Still, the collapse of the Communist system was due both to economic failure and to the repression and alienation of the citizens who lived under it...

...But here is one reader's attempt to provide a brief epilogue to their challenging play: Prime Minister: I got rid of my first Economic Advisor because he kept telling me the same thing: "Damn the institutional and political roadblocks, full speed ahead...

...Advisor II: Like Yeltsin—but perhaps with more regard for democratic proprieties...

...Prime Minister: You sound like the editorial page of the New York Times...

...We are used to such confrontations in the law...

...Adam Smith Goes to Moscow consists of a week-long conversation between the hypothetical Prime Minister of a newly liberated Eastern bloc nation and his Advisor, a visiting American economist fervently committed to the free market...

...Now that we have repudiated Communism, isn't there the insidious danger that people may perceive the market economy as yet another ideological cult or Utopian dogma...

...If you can't get rid of the budget deficit, at least shrink it...

...In their Preface, the authors say: "Our purpose is to stimulate thought, not to render judgment...

...There is the heart of the issue: The economist offers theoretically "sound" advice...

...Adams, a former president of Michigan State University, is now the Vernon F. Taylor Distinguished Professor of Economics at Trinity University in Texas, and Brock is the Moeckel Professor of Business at Miami University in Ohio...

...Cut the military, and create jobs by cleaning up the environment and tackling other urgent public necessities, such as repairing the rotten infrastructure, strengthening schools and universities, improving the public health system...

...By hanging in there and doing something, a lot of things, every day...

...And bolster the legal foundations of capitalism—or, if you prefer, the mixed economy...

...And the relative dependability of state agencies for meeting domestic needs has given way to uncertainty, not to mention frequent demands for bribes or other forms of "lubrication" to consummate deals...

...Reviewed by Leonard Silk Senior Research Fellow...

...Nevertheless, he concedes that the Advisor does help him appreciate the need to link marketization with privatization...

...Advisor II: I hope so...

...Undeterred by such genuine political and social dangers, the Advisor remains platitudinous: You can't cross a chasm in two jumps...

...The seriousness of the resulting dilemma can be seen today in Eastern Europe, where economic disorder, falling output and living standards, soaring inflation, and rising unemployment are quickly accomplishing, as a Moscow joke has it, what the old regime failed to do in 70 years: make Communism look good to the people...

...The Prime Minister tells him...

...Restoring it, for whatever reason, would force all those people to give up their dreams of a better economic life and a more humane political process...

...The Prime Minister answers that if he were to do that, "half of our people would starve...

...Reconstruct an Eastern European trade bloc, so that all of you can trade with each other until your industries are efficient enough to compete in the West or the Third World...

...And Adams and Brock give each one a persuasive voice...

...The Advisor makes what he doubtless considers a withering rejoinder: "It is economic science you criticize...

...They have tried to make their play a fair presentation of both sides, in accordance with an old prescription for good theater: "In the true drama, all characters are in the right...

...That is the prerogative of the reader...

...Prime Minister: One last thing...

...The authors, as I have noted, leave the resolution up to the reader—an impossible task...

...The Advisor, schooled in economic theory, is sure a market system cannot work without the privatization of industrial organizations and the removal of bureaucratic and state controls...

...Both works demonstrate the advantages of the dramatic form over one-sided polemics in enabling the reader to weigh conflicting views...

...By being as inspiring and winning as Havel...

...Advisor II: Cleverness, persistence, detailed plans, faith, hope—a kind of New Deal...

...No, not science," counters the Prime Minister, "but humanity's arrogance in an age of science...

...Walter Adams and James W. Brock, have used the ancient device of a Socratic dialogue to explore the problems the ex-Communist countries of Central and Eastern Europe face in trying to effect a twofold transition: from dictatorship to democracy, and from a state-run to a market economy...

...How do 1 do all that at once...

...Prime Minister: Thanks a lot...

...They also have to fully dismantle the Stalinist economic structure, along with the habits and attitudes inculcated by decades of Communism...

...Rather than a purely capitalist model, what you need is a mixture of private, public and communitarian elements...

...says the Advisor...

...To underscore his point, he goes on to quote Vaclav Havel: "'We have to abandon the arrogant belief that the world is merely a puzzle to be solved, a machine with instructions for use waiting to be discovered, a body of information to be fed into a computer in the hope that, sooner or later, it will spit out a universal solution.'" Standard economic theory clearly offers no universal solution to the problems that arise in moving from totalitarian socialism to political and economic freedom...

...Most observers further agree that crime in the former Eastern bloc is worse today than it has ever been...

...the politician knows the institutional milieu in which it will be applied, and senses what the real consequences will be...

...He urges drastic action to eliminate the budget deficit...

...Your reaction confirms my suspicion that we live in a time when reality conflicts with platitudes, when facts conflict with a priori interpretations—a time of conflict between theory that plays fast and loose with practice and theory that learns from practice...

...Then there are the other hangovers of industrial "giantism": massive state-built, state-run factories and farms, poorly trained labor and management, public doubts about the old leaders and their agents, and a wary resentment toward the "new capitalists"—many of whom come from the old ruling elite or from the criminal elements of society...